ACCOUNTING FOR INVENTORIES IN LIVESTOCK, AGRICULTURE, FORESTRY, AND MINERAL OIL & GAS INDUSTRIES
1. INTRODUCTION
Inventories represent significant current assets in industries where production cycles are long, market prices volatile, biological transformation inherent, and environmental factors critical. Livestock, agricultural produce, forestry products, and extractive outputs such as crude oil and natural gas require sector-specific accounting because traditional inventory methods are insufficient for fair representation.
ICAI, Ind AS, IFRS, and international frameworks recognise this uniqueness and prescribe specialised guidance. This article provides a consolidated, academically structured, professionally rigorous treatment of inventory accounting in these sectors, combining:
- Recognition and measurement principles
- NRV-based valuation
- Fair value requirements under Ind AS 41 / IAS 41
- Numerical illustrations
- Corporate case studies
- Cross-country comparison
- Disclosure formats and accounting policies
The objective is to deliver a detailed reference document suitable for Chartered Accountants, auditors, bankers, and financial analysts.
2. REGULATORY AND CONCEPTUAL FRAMEWORK
2.1 ICAI Framework
ICAI mandates compliance with applicable Ind AS for companies falling under its thresholds. Two standards govern most inventory-related issues:
Ind AS 2 — Inventories:
Applies to harvested agricultural produce, felled timber, crude oil stockpiles, refined inventory, processed goods, and stores & spares.
Ind AS 41 — Agriculture:
Governs biological assets until the point of harvest; valuation is at fair value less costs to sell.
ICAI’s Guidance Notes on:
- Accounting for Agriculture
- Accounting for Forestry
- Accounting for Extractive Industries
- Accounting for Livestock
- enhance interpretation.
2.2 Ind AS / IFRS Framework
Ind AS 2 ↔ IAS 2 (post-harvest inventory)
Ind AS 41 ↔ IAS 41 (biological assets)
Ind AS 106 ↔ IFRS 6 (exploration & evaluation)
Ind AS 41 requires biological assets to be measured at fair value less costs to sell. After harvest, Ind AS 2 takes over using cost/NRV rules.
2.3 International Practices
United States (US GAAP)
No fair value requirement for biological assets
ASC 330 governs inventories
Extractive industries follow Full Cost or Successful Efforts Method
European Union (EU)
IFRS adopted widely
Sustainability-linked disclosures required
Agricultural produce measured at fair value until harvest
3. DEFINITIONS AND KEY CONCEPTS
3.1 Inventory (Ind AS 2)
Items held for sale, in production, or to be consumed in production.
3.2 Biological Assets
Living plants and animals undergoing biological transformation.
3.3 Agricultural Produce
Harvested output from biological assets.
3.4 Fair Value
Market-based measurement reflecting exit price.
3.5 Net Realisable Value (NRV)
Estimated selling price minus:
- costs to complete
- costs to sell
3.6 Cost Formula
FIFO
Weighted average
Specific identification (for unique items)
4. INDUSTRY-WISE INVENTORY ACCOUNTING TREATMENT
4.1 LIVESTOCK INDUSTRY
4.1.1 Nature of Inventories
- Breeding stock
- Dairy animals
- Poultry (broilers, layers)
- Aquaculture species
- Output: milk, eggs, wool, meat
4.1.2 Initial Recognition
Biological assets measured at fair value less costs to sell.
Post-harvest items (milk, eggs) measured under Ind AS 2 at cost/NRV.
4.1.3 Key Valuation Drivers
- Breed, age, weight
- Mortality risk
- Feed cost volatility
- Market auction prices
4.2 AGRICULTURAL INDUSTRY
4.2.1 Nature of Produce
- Grains
- Fruits
- Vegetables
- Tea, coffee
- Cotton, sugarcane
4.2.2 Initial Recognition
Agricultural produce is measured at fair value at the point of harvest. Post-harvest costs (cleaning, grading, storage) fall under Ind AS 2.
4.2.3 Factors Affecting NRV
- Grade
- Moisture content
- Mandi price variation
- Export parity price
4.3 FORESTRY INDUSTRY
4.3.1 Nature of Inventories
- Timber
- Logs
- Pulpwood
- Bamboo
- Resins
- Rubber sheets
4.3.2 Measurement Considerations
Standing forests = fair value under Ind AS 41
Harvested logs = inventory under Ind AS 2
4.3.3 Valuation Inputs
- Species
- Girth & height
- Moisture content
- Satellite-based biomass models
- Forest auction prices
4.4 MINERAL OIL & NATURAL GAS INDUSTRY
4.4.1 Nature of Inventories
- Crude oil
- Condensate
- Natural gas storage
- Refined products
- Drilling material & chemicals
4.4.2 Valuation Approach
Cost accumulation depends on:
- exploration
- drilling
- production
- refining
- NRV depends on:
Brent/WTI prices
- refinery margins
- pipeline tariffs
5. MEASUREMENT PRINCIPLES
5.1 Cost
Cost includes:
purchase cost
conversion cost
overheads
transport
storage (in limited cases)
5.2 Fair Value
Used for biological assets under Ind AS 41.
5.3 Net Realisable Value
NRV = Selling price − Costs to complete − Selling costs
Sector-specific complexities must be disclosed.
6. RECOGNITION AND INITIAL MEASUREMENT
6.1 Livestock
Fair value less costs to sell at reporting date.
6.2 Agricultural Produce
Fair value at point of harvest → deemed cost for Ind AS 2.
6.3 Forestry
Transition from Ind AS 41 to Ind AS 2 after harvesting.
6.4 Oil & Gas
Cost-based measurement; NRV driven by global commodity markets.
7. SUBSEQUENT MEASUREMENT
Lower of cost or NRV (Ind AS 2)
Biological assets remeasured at fair value at each reporting date
8. DISCLOSURE REQUIREMENTS
Entities must disclose:
- Inventory categories
- Cost formulas
- NRV adjustments
- Fair value assumptions
- Quantity disclosures (MT, litres, barrels, SCM)
- Sensitivity analysis
- Commodity risk exposures
9. ACCOUNTING POLICIES
A complete accounting policy includes:
- Basis of measurement
- Treatment of biological assets
- Methods of apportioning joint costs
- Fair value hierarchy (Level 1/2/3)
- NRV methodology
- Transition from fair value to cost
10. NUMERICAL ILLUSTRATIONS
10.1 Livestock Example: Poultry
Feed cost: 12,00,000
Veterinary: 3,50,000
Labour: 2,00,000
Total cost: 17,50,000
Fair value less costs to sell: 18,20,000
Gain (Ind AS 41): 70,000
10.2 Agriculture Example: Wheat
Cost = 2,450 + 180 = 2,630
NRV = 2,520 – 90 = 2,430
Inventory = 2,430
10.3 Forestry Example: Rubber
Cost per MT = 41,000
NRV = 39,500
Loss = 1,500 per MT
10.4 Oil Refinery Example
Cost = USD 85
NRV = USD 74
Write-down = USD 11/barrel
11. CORPORATE CASE STUDIES
11.1 Indian Dairy Cooperative
Uses actuarial herd valuation
Milk carried at NRV
Biological gains recognised in P&L
11.2 Global Forestry Company
Uses LiDAR for biomass estimation
Timber auction prices determine NRV
11.3 Indian Refinery
Uses average cost method
NRV based on Brent-linked pricing
12. CROSS-COUNTRY COMPARISON India
Fair value for biological assets
NRV for produce Ind AS alignment with IFRS United States Cost model preferred No fair value requirement European Union Stronger sustainability disclosures IFRS 41 adopted
13. INTEGRATED SUMMARY
The four sectors share: high market risk specialised valuation techniques heavy dependence on NRV need for transparent disclosures
14. CONCLUSION
Inventory accounting in these sectors demands rigorous valuation, strong internal data systems, and compliance with ICAI & international standards. Fair value and NRV techniques must be applied consistently with professional judgement
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